Final Results

16th May 2007 07:03

Land Securities Group Plc16 May 2007 16 May 2007 For immediate release Land Securities Group PLC ("Land Securities"/ "Group") Preliminary results for the year ended 31 March 2007 Highlights • Excellent progress on the development programme • Lettings totalling 1.5 million sq ft • Valuation surplus on development of £454m • Land Securities Trillium new business • £1.4bn invested • 45% growth in floor space under management • Conversion to REIT status on 1 January 2007, removing latent capital gains tax liability of £1.3bn • Combined portfolio valuation of £14.8bn - 10.6% valuation surplus • Pre-tax profit of £1,979.1m (2006:£2,359.2m) • Revenue profit up by 0.2% at £392.2m • Net assets per share up • Basic NAV up 44.3% to 2304.00p • Adjusted diluted NAV up 14.1% to 2181p (up 17.6% excluding conversion charge) • Earnings per share • Basic eps at 753.59p up 110.5% • Adjusted diluted eps marginally down by 0.4% at 70.20p. • Final dividend of 34.0p per share, giving a full year dividend of 53.0p (13.5% increase) • Move from bi-annual to quarterly dividend payments in 2007/08 at 16.0p per share for the first three quarters, implying a further increase of over 20% • Leading the sector in environmental achievements • First property company to achieve ISO14001 accreditation for Environmental Management System across entire property business • Only property company to participate in voluntary UK Emissions Trading Scheme, saving 11,145 tonnes of CO2 emissions over five years • Zero net carbon emissions for 2005/06 from own occupied offices and mall areas of shopping centres Commenting on the results, Francis Salway, Chief Executive of Land Securitiessaid: "We have delivered a total business return, in the form of growth in NAVand dividend, of 16.6%, demonstrating strong growth in the underlying value ofthe business for shareholders. "We have had particular success in meeting our two key objectives for the year -leasing 1.5 million sq ft from our development programme and growing ourproperty partnerships business, Land Securities Trillium, with £1.4bn investedand 45% growth in floor space under management. "Land Securities' successful conversion to REIT status in January 2007 hasenabled us to announce a substantial increase in the dividend. In addition,with tax considerations no longer constraining our investment decision making,we have sold or marketed for sale some £1.1bn worth of property since 1 January.As we expected, growth is slowing across some segments of the traditionalproperty investment markets, endorsing our decision to focus on developmentactivity and the expansion of our property outsourcing business." -Ends- For further info, please contact: www.landsecurities.com/prelims2007 Francis Salway / Melissa Winsor Stephanie Highett / Dido LaurimoreLand Securities Group PLC Financial DynamicsT +44 (0)20 7413 9000 T +44 (0)20 7831 3113 Notes to editors Land Securities is the UK's leading real estate investment trust. Our nationalportfolio of commercial property, worth many billions of pounds, includes someof Britain's best-known shopping centres, such as the Birmingham Bullring andGunwharf Quays in Portsmouth, as well as London landmarks such as the PiccadillyLights and Westminster City Hall. We are leading urban renaissance through ourbillion pound development programme, transforming Exeter, Bristol and Cardiffcity centres as well as key sites in Central London. We are also one of theleading names in property outsourcing and through urban community developmentare involved in long-term, large-scale regeneration projects in the south-east. Chairman's statement This is my first statement to you as Chairman of Land Securities. Mypredecessor, Peter Birch, stepped down from the Board on 1 January 2007. Peterled a period of substantial change that has left the Group in good shape. TheBoard and I would like to thank him for his contribution. Land Securities invests in property to generate returns in excess of ourweighted average cost of capital. Our total business return for the year of16.6% compares with an average weighted cost of capital of 6.75%. Over a sixyear period, Land Securities has delivered a total shareholder return of 206.3%compared to 36.1% for the FTSE 100 and 194.8% for the FTSE Real Estate Index.We have announced a substantial increase in our dividend, with the proposed fullyear dividend representing a 13.5% increase over the preceding year. We havealso announced a further significant increase for the current year. Our business activities comprise property investment, development and propertyoutsourcing. Each presents different risks and opportunities and provides adifferent level of return. It is our challenge to maximise return taking intoaccount our risk assessment for each activity. For property investment, this means adding value by active management andjudging the right moment to buy or sell. For development, it means creating theright product and delivering it on time and on budget, at the right moment inthe market cycle. For property outsourcing it means accessing new markets andnew income streams profitably. I have been impressed by the people at Land Securities. We have a substantialpool of talent to draw from, encompassing a wide range of skills. Attracting,retaining and developing this talent is fundamental to our success. As a capital intensive business, access to capital, and its efficient use, iscritical. Our debt structure is an important element. In the past year weraised £800m of publicly listed notes with an average coupon of 5.03%,refinanced our corporate banking facility of £1.5bn, arranged a £1.0bnacquisition facility and launched our £750m Euro Commercial Paper Programme. Weused these funds to invest £1.9bn in Land Securities Trillium and development,which the Board identified 12 months ago as key drivers of future value. Thatdecision was timely, given the lower levels of growth now evident across theinvestment market. My first day as Chairman of the company coincided with our conversion to RealEstate Investment Trust (REIT) status. This eliminated the double taxation ofcompany and shareholder, which has been an impediment for the quoted propertysector. REITs now offer tax equivalence to direct ownership of property, butwith substantially greater liquidity and professional management. Since becoming Chairman, the Board and I have identified three key issues facingour business. The first I have already alluded to: generating returns frominvestment property. The era of valuation gains driven by market re-pricing islargely over. Our challenge will be to deliver returns through the applicationof our skills and the identification of new growth markets. We havedemonstrated the latter through our move into the Public Private Partnership(PPP) and Private Finance Initiative (PFI) markets this year with theacquisition of SMIF. The second issue is transparency. Land Securities is recognised as a leader inthis area. Under the new Transparency Directive all companies have to produceInterim Management Statements. We will be doing so, but will not be moving toquarterly reporting or quarterly valuations. The Board believes that the linkbetween strategy and financial returns in the property sector is only evidentover a longer time frame. The third issue is how we do things. We have a good reputation for the way inwhich we address the impact of our activities on communities and theenvironment. As one of the UK's leading developers, we are committed toproviding attractive buildings and spaces that enhance the quality of the builtenvironment, for the benefit of both occupiers and the wider community. We haveled the property sector in being a voluntary participant in the UK EmissionsTrading Scheme (UKETS) since its inception in 2002 and have reduced carbonemissions by three times the target set for us. The Board would like to thank our colleagues, customers and suppliers forhelping to deliver another year of strong growth for Land Securities. Thanks toyou the business is prospering and we can look to the future with confidence. Chief Executive's Report I am delighted that we achieved considerable success in implementing the two keyobjectives we set for the year. The first was to meet letting targets acrossour development programme. We exceeded our targets in leasing up some 143,000 sqm. The second objective was to grow Land Securities Trillium. We securedsubstantial new business opportunities resulting in floor space under managementincreasing by 45% over the year. The ungeared total property return on our investment portfolio was 16.2%, ascompared to 15.8% on the Investment Property Databank (IPD) Quarterly Index.The ungeared return on capital employed on our property outsourcing business(excluding acquisitions made in the last two months of the year) was 16.9%. TheGroup pre-tax return on equity was 21.1%. Our pre-tax profit, which includes revaluation surpluses, profits on disposalsand exceptional items, was £1,979.1m (2006: £2,359.2m). The reduction inpre-tax profit is explained by the slightly lower revaluation surplus in thecurrent year, and the exceptional profit of £293.0m in the prior year from thesale of our interest in the Telereal joint venture. Revenue profit, our measureof underlying or recurring profit, was up marginally by 0.2% at £392.2m (2006:£391.3m). We achieved this despite both the expected reduction in profit on ourlargest property outsourcing contract with the Department for Work and Pensions(DWP) and the loss of rental income on a number of substantial investmentproperties being vacated prior to redevelopment. Our conversion to REIT status, which brings tax exemption on approximately 90%of our current activities, will result in us paying a REIT conversion charge inJuly this year estimated at £315.0m. The benefits of REIT conversion are theelimination of a latent capital tax liability of £1,327m and the boosting ofpost-tax earnings through exemption from corporation tax on qualifyingactivities. We will remit this saving in corporation tax to shareholders by wayof an increased dividend. As such, we have announced a substantial increase toour final dividend payment, giving a full year dividend of 53.0p per share, up13.5% (2006: 46.7p per share). The increase in dividend over three years hasbeen 42.9%. In recognition of the importance of income distributions in a REITenvironment, we will move to quarterly dividend payments. The first threepayments, at 16.0p per share, will be payable in October 2007, January 2008 andApril 2008. These quarterly dividend payments imply a further dividend increasefor 2007/08 of over 20%. We have demonstrated strong execution in leasing up our development programme.In London, we have let, or agreed terms to pre-let, approximately 95,000sq m ofoffices since 1 April 2006. Our project at Cardinal Place in Victoria is nowalmost fully let, re-establishing Victoria as a location for major corporates,and substantially improving the future redevelopment prospects for our otherextensive holdings in the area. In retail, we have made good progress on leasing up our six projects now underconstruction with 82,000sq m of development lettings during the year. Ourshopping centre scheme in Exeter will open in the autumn and is already 85%pre-let or agreed to be pre-let. This scheme is breaking the mould both throughits low carbon footprint and our commitment to let one of the streets toindependent retailers. For Land Securities Trillium, 2006/07 has been a year of exceptional growth andachievement. We have consolidated our position in the infrastructure marketthrough our £910.5m acquisition of SMIF, which now has equity stakes in 85 PPPcontracts. We intend to secure third party investment into these assets by theend of calendar year 2007 while retaining asset management responsibilities. Wehave also concluded a property outsourcing contract with Royal Mail and, inpartnership with QinetiQ, were appointed preferred bidder on a major Ministry ofDefence (MoD) outsourcing contract. This phase of growth for Land SecuritiesTrillium is significant because property outsourcing and PPP bring greaterbenefits from economies of scale than property investment. The UK economy is performing strongly. We expect growth in rental values acrossour investment portfolio to be slightly above trend in the short-term, drivenparticularly by buoyant leasing conditions in the London office market. However, the year end valuation of our investment portfolio showed a slowing inthe rate of growth in capital values in the second half of the year. This isconsistent with our view that the yield re-pricing of UK property assets isclose to having run its course and, indeed, lesser quality property investmentsin the retail sector have seen weaker yield pricing and a fall in values overthe last six to nine months. Against this background, we expect our property investment business to achieveoutperformance on a relative basis primarily through our developmentcapabilities and the scale of our development programme. We are also pleased tobe investing substantial capital in property outsourcing and PPP/PFI (PPP)contracts, which offer attractive return prospects with low volatility. Business review Introduction Over the year we made excellent progress with our development programme. We alsodelivered on our aspiration to grow Land Securities Trillium by committing inexcess of £1.4bn to acquisitions and new contracts for this business unit. Most notably during the period we converted to REIT status. This beneficialchange in tax status for the Group is explained in more detail later in thisreview. Following conversion and our exemption from future capital gains tax,we have accelerated our sales programme, particularly in the retail sector. Thelow level of prevailing yields relative to our marginal cost of debt means thatthis sales programme will be accretive to earnings. Our combined portfolio delivered a total property return of 16.2%, outperformingthe IPD Quarterly Index by 0.3%. This outperformance was attributable to oursignificant exposure to the buoyant London office market and also to developmentactivities. The valuation surplus on our developments was £453.9m, whichrepresented 33% of the overall valuation surplus on 17% of the assets. At thesector level, our assets underperformed their IPD sector benchmarks. This islargely explained by less positive rental value growth on our retail warehouseportfolio and the older office buildings in our Victoria estate. The growth in Land Securities Trillium came from the £910.5m acquisition of SMIF(the largest PPP investment business in the UK); the £439.0m acquisition of ahotel portfolio from Accor involving the provision of maintenance services, anda £71.1m property outsourcing contract with Royal Mail. In addition, our Metrixjoint venture with QinetiQ was selected as preferred bidder on Package 1 of theMoD training outsourcing contract and provisional preferred bidder on Package 2. Regulatory The most important change in our regulatory environment was the new legislationintroducing REITs in the UK from 1 January 2007 and, on that day, we elected toconvert to REIT status. A REIT is a listed entity, whose main business is toinvest in property and which enjoys exemption from UK corporation tax on incomeand capital gains from qualifying property. In return, a REIT is required todistribute to shareholders a minimum of 90% of its taxable profits fromqualifying properties. Conversion to REIT status eliminated our latent capitalgains tax liability on qualifying assets, which stood at £1,327m. Thisrepresents a 282p per share increase in our net asset value. However, this ispartially offset by our liability on REIT conversion to a one-off tax chargecalculated at 2% of the gross value of our qualifying properties. This taxcharge is expected to be approximately £315.0m or 67p per share. Although itwill be payable in July 2007 it has been recognised in this year's results. REIT conversion is not expected to constrain our business operations but ratherprovide some significant benefits which relate predominantly to tax. As we willno longer be subject to capital gains tax on the disposal of qualifyingproperties, this removes tax considerations in respect of selling propertyassets from the investment portfolio. In addition, our new tax status hasboosted our post-tax returns relative to our weighted average cost of capital. As expected, our tax exempt activities include the majority of our propertyoutsourcing business and also development activities if the developments aresubsequently held as investments. For the full year, almost 90% of the incomegenerated by the Group came from qualifying activities. A REIT is permitted tohave up to 25% of its business, measured by both profits and gross assets, innon-qualifying taxable activities. We intend to use this capacity where we canidentify opportunities which produce post-tax returns that are attractiverelative to the untaxed returns from qualifying activities. An example of thisis the PPP business, SMIF, which we acquired in February of this year and willbe tax paying. We have also announced a substantial increase in our dividend, which reflectsthe increased tax savings we will enjoy as a REIT. This is covered in moredetail below. Competitive landscape Land Securities operates principally in the UK commercial property market. Wewere the world's third largest REIT as measured by market capitalisation at 31March 2007, which at £10.1bn represented 28.5% of the UK REIT sector. We have adiversified business model focused on retail property, London offices andproperty outsourcing. Within these core sectors, our activities includeproperty management, investment, development and the provision of propertyrelated services. We are the only REIT to operate on a significant scale in theproperty outsourcing market. Since 1 January, 61.0% of the UK quoted property sector has elected for REITstatus and this emerging sector now has a total market capitalisation of£35.3bn. We expect further growth in the sector over time with the flotation ofnew REITs. The UK commercial property market has an estimated total value of £710bn,excluding Government-owned property, with approximately half of this market heldby owner occupiers. Of the balance, which comprises the property investmentmarket, only 16% is held in REITs. Experience in other countries following theintroduction of REIT structures indicates that it is reasonable to anticipate asubstantial growth in the size of the quoted REIT sector in the medium-term evenif, as we expect, only a small proportion of pension funds and other propertyinvestors move their holdings from direct property to REITs. Over the second half of the financial year we have seen a moderation in thelevel of investor demand for commercial property investments. Demand for Londonoffice investments is still strong, albeit less so, and the retail propertyinvestment market has seen a return to equilibrium conditions. However, thefundamental attractions of the UK commercial property markets remain. Theseinclude economic and political stability together with the UK's long-term leasestructure. The reduction in investor demand has made the investment market lesscompetitive in certain sectors, but property yields are still at a level whichmakes acquisitions less attractive than development and property outsourcing.This is where we continue to focus our activities while remaining alert toselective property acquisitions. The scale of our business continues to be a source of competitive advantage, asdemonstrated by our ability to finance large scale development and investmentacquisitions at a lower cost of debt than many others in the industry. We alsohave a relatively large market share of the sectors in which we invest, whichprovides competitive advantage in terms of relationship management with keycustomers. We plan to continue capitalising on this to increase market share ineach of our core markets. Headline results Profit before tax was £1,979.1m, down from £2,359.2m a year ago. Revenueprofit, our measure of underlying profit before tax, increased from £391.3m to£392.2m. Earnings per share more than doubled to 753.59p (2006: 357.95p) withadjusted diluted earnings per share showing a 0.4% decrease on last year to70.20p (2006: 70.47p). The impact of conversion to REIT status has resulted in three exceptional items,two of which affect our post-tax results. The first is the £315.0m conversioncharge payable in July this year. The second is the release of a £2,309.2mdeferred tax provision, a non-cash item, relating primarily to the accumulatedvaluation surplus on the investment portfolio. The third is a net exceptionaltax credit of £98.0m in respect of joint ventures, which is disclosed withinprofit before tax as part of our share of the joint ventures post-tax profits.The net effect of these three exceptional items is to increase profit after taxby £2,092.2 to £3,528.3m and a 110.5% increase in earnings per share. Adjusteddiluted earnings per share, which is based on revenue profit and removes theeffect of the exceptional items related to REIT conversion, showed a marginaldecrease of 0.4%. The combined portfolio rose in value from £12.9bn to £14.8bn. This included avaluation surplus of £1,396.3m or 10.6%. Net assets per share rose by 44.3% to2304p from 1597p, with adjusted diluted net assets per share rising by 14.1% to2181p (2006: 1912p). Profit before tax The main drivers of our profit before tax performance are the change in value ofour investment portfolio (including any profits or losses on disposal ofproperties), our net rental income, the performance of our Property Partnershipsbusiness, Land Securities Trillium, and the amount of interest we paid. Thedegree to which movement on these and other items led to the reduction againstlast year in our profit before tax to £1,979.1m (2006: £2,359.2m) is explainedin Table 1 below: Table 1: Principal changes in profit before tax and revenue profit Profit Revenue before tax profit £m £mYear ended 31 March 2006 2,359.2 391.3Valuation surplus (302.3) -Profit on disposal of Telereal (1) (293.0) -Distributions received from Telereal (2) (11.7) -Impact of Telereal sale 30 September 2005 (2) - (16.1)Profit on disposal of non-current properties 44.0 -Profit on sale of trading properties (3.9) -Increase in capitalised interest 7.7 7.7Amortisation of bond de-recognition (3) 11.0 -Long-term development contract profits (4) (7.6) -Goodwill impairment (5) 64.5 -Property outsourcing profit (6) (2.0) (2.0)Net rental and service charge income (7) 60.5 60.5Indirect costs (8) (2.5) (2.5)Interest on increased debt (46.7) (46.7)Debt restructuring charges (19.2) -Exceptional deferred tax release following REIT conversion 98.0 - within the joint ventures (9)Other 23.1 -Year ended 31 March 2007 1,979.1 392.2 (1) The disposal of our interest in the Telereal joint venture was completedon 30 September 2005. (2) Distributions/profits from Telereal ceased on 30 September 2005following its disposal, although this has been largely mitigated by the TelerealII contract and interest on the disposal proceeds. (3) The debt instruments issued as part of the refinancing in November 2004do not meet the requirements of IAS39 as they are not deemed to be substantiallydifferent from the debt they replaced. As a result, the book value of the newinstruments is reduced to the book value of the debt it replaced and thedifference is amortised over the life of the new instruments. The decrease inamortisation over the comparable period is a reflection of the maturity profileof debt replaced. (4) Lower levels of activity, with the recognition of profits on thedevelopment contract at Broadcasting House being below the profit recognised onBankside 1 in the previous year. (5) Goodwill arising on the acquisition of Tops Estates PLC in June 2005 wasimpaired in the year ended 31 March 2006. There was no goodwill impairment inthe current year. (6) Lower profits on DWP following increased vacation, offset by increasesin Telereal II and Norwich Union. (7) Increase in rental income and service charge income is largely driven byacquisitions made in the year ended 31 March 2006. (8) Primarily due to higher staff costs for existing employees and increasedemployee numbers following acquisitions. (9) The results of joint ventures are reported post-tax. Revenue profit Revenue profit is our measure of the underlying pre-tax profit of the Group,which we use internally to assess our performance. It includes the pre-taxresults of our joint ventures but excludes capital and other one-off items suchas the valuation surplus, gains on disposals and profits on long-termdevelopment contracts. Revenue profit for the year grew by 0.2% from £391.3m to £392.2m. Anexplanation of the year on year change is also given in Table 1. While Land Securities Trillium's operating profit is at a similar level to lastyear, at the revenue profit level there has been a decline of £21.5m, largelyattributable to the SMIF acquisition interest and the anticipated decline inprofitability on the DWP contract. In addition, while operating profits haveincreased on certain contracts so too has the associated capital employed, andallocated interest cost, leading to a smaller pre-tax profit increase. WithinLondon Portfolio, we have lost rental income as we freed up properties forredevelopment with no associated reduction in interest costs. At a Group level,the decline in underlying pre-tax profits in Land Securities Trillium and theloss of rental income in London have been offset by an increase in passing rentsin our Retail Portfolio leading to the small increase in revenue profit overlast year. Towards the end of the financial year, Land Securities Trillium purchased SMIF,a business which owns and provides management services to PPP projects. It hasbeen our intention from the outset to divest the PPP investments by transferringthem to a fund and bringing in outside investors while maintaining a minorityinterest. We have therefore accounted for these assets as a disposal group.The implications of this are that we do not consolidate the individual assetsand liabilities of the PPP investments. Instead, they are held in the balancesheet at fair value less costs to sell and we do not recognise our share of theunderlying net income of the PPP projects. However, we do include the interestcost of the loan associated with acquiring SMIF in Group revenue profit. Reconciliation between profit before tax and revenue profit is shown in Table 2. Table 2: Reconciliation of profit before tax to revenue profit Year ended Year ended 31/03/07 31/03/06 £m £mProfit before tax 1,979.1 2,359.2Valuation surplus - Group (1,307.6) (1,579.5)valuation surplus - joint ventures (75.1) (105.5)Non-current property disposals (118.4) (75.3)Goodwill impairment - 64.5Mark-to-market adjustment on interest rate swaps (17.4) 2.2Eliminate effect of bond exchange de-recognition 17.1 28.1Debt restructuring charges 19.2 -Credit arising from change in pension scheme benefits - (8.3)Profit on disposal of Telereal joint venture - (293.0)Adjustment to restate the Group's share of Telereal earnings from a distribution basis to an equity basis - 5.0Joint venture tax adjustment (76.8) 37.5Profit on sale of trading properties (13.6) (21.7)Long-term development contract profits (14.3) (21.9)Revenue profit 392.2 391.3 Earnings per share Basic earnings per share grew by 110.5% to 753.59p (2006: 357.95p), the increasepredominantly relating to the one-off tax items associated with our adoption ofREIT status, together with the reasons set out in more detail in Taxation below. In the same way that we adjust profit before tax to remove capital and one-offitems to give revenue profit, we also report an adjusted earnings per sharefigure. This is a post-tax measure and includes some additional adjustments torevenue profit. The adjustments to earnings per share are set out in note 7 tothe financial statements. They are based on the guidance given by EuropeanPublic Real Estate Association (EPRA), with a limited number of furtheradjustments to reflect better our underlying earnings. Adjusted diluted earningsper share declined from 70.47p per share in 2006 to 70.20p per share in 2007, a0.4% decrease. The decline in adjusted earnings per share is attributable to areduction in profits on long-term development contracts and trading propertysales, largely offset by a lower tax rate following REIT conversion. Total dividend We are recommending a final dividend payment of 34.0p per share. Taken togetherwith the interim dividend of 19.0p, this makes a full year dividend of 53.0p pershare (2006: 46.7p), which represents a 13.5% increase. Part of thissubstantial increase is attributable to the tax we have saved by being a REITfor the final quarter of this financial year. REIT conversion also impacts on the make-up of the Group's dividend, which nowconsists of two components: a property income distribution (PID) from the REITqualifying activities and a dividend distribution from the non-qualifyingactivities (non-PID). The aggregate of these two components will still bereferred to as our total dividend. We are obliged for certain shareholders towithhold tax, currently at a rate of 22% (decreasing to 20% from 6 April 2008),from the PID element of the dividend. Our total dividend is therefore a grossdividend. Since Land Securities only became a REIT on 1 January 2007, three-quarters ofthis financial year fell outside REIT status. While only one payment will bemade on 23 July 2007, shareholders will find an explanation of the individualcomponents of the total dividend on the tax voucher sent out with the payment.A note on the tax consequences for shareholders and forms to enable certainclasses of shareholder to claim exemption from withholding tax are available onour website at www.landsecurities.com. Of the proposed final dividend of 34.0p, only 10.0p is a PID. This is subjectto 22% withholding tax for relevant shareholders. Next year we expect a farhigher proportion of the total dividend payments to be in the form of a PID. The full year dividend distribution is covered 1.3 times by adjusted earnings(2006: 1.5 times). Subject to approval by shareholders at the Annual GeneralMeeting to be held on 17 July 2007, the final dividend will be paid on 23 July2007 to shareholders on the Register on 22 June 2007. For the 2007/08 financial year, we will be making four dividend payments, inOctober 2007, January 2008 and April 2008, and (subject to shareholder approval)in July 2008. The first three quarterly payments will be 16.0p per share,implying an increase of over 20% on the 2006/07 year dividend on an annualisedbasis. The first three quarterly dividends will be 80% PIDs, with the finaldividend to be confirmed at the time. Table 3: Total dividend Interim Final Total Dividend Dividend Dividend p p pProperty income distribution - 10.0 10.0Non-property income distribution 19.0 24.0 43.0Total 19.0 34.0 53.0 Balance of business tests REIT legislation specifies conditions in relation to the type of business a REITmay conduct, which the Group is required to meet in order to retain its REITstatus. In summary, at least 75% of the Group's profits must be derived fromREIT qualifying activities (the 75% profits test) and 75% of the Group's assetsmust be employed in REIT qualifying activities (the 75% assets test).Qualifying activities means a property rental business. The result of thesetests for the Group for the three month period we were a REIT, the wholefinancial year (which is more representative of our ongoing position), and atthe balance sheet date is as follows: Table 4: REIT balance of business tests For the three months ended / For the year ended 31 March 2007 as at 31 March 2007 Tax-Exempt Residual Adjusted Tax-Exempt Residual Adjusted Business Business Results Business Business ResultsAdjusted profit before tax (£m) 104.5 4.1 108.6 358.3 42.9 401.2Balance of business - 75% profits test 96.2% 3.8% 89.3% 10.7% Adjusted total assets (£m) 15,695.8 2,111.6 17,807.4Balance of business - 75% assets test 88.1% 11.9% Net assets At the financial year end, net assets per share were 2304p, an increase of 707pover the year. A significant part of this increase resulted from our conversionto REIT status, as we were able to release all accumulated deferred tax onrevaluation surpluses to 31 December 2006. The impact of this, less our REITconversion charge, amounted to 447p per share. In common with other property companies, we calculate an adjusted measure of netassets which we believe better reflects the underlying net assets attributableto shareholders. In previous years, the main adjustment to net assets has beento remove the deferred tax on revaluations. Since we no longer provide fordeferred tax on revaluations due to our REIT status, this adjustment is nolonger required. As a result, our adjusted net assets are now lower than ourreported net assets primarily due to the debt adjustment we continue to make.Under IFRS, we do not show our debt at its nominal value, although we believe itwould be more appropriate to do so and we therefore adjust our net assetsaccordingly. At the year end, adjusted diluted net assets per share were 2181pper share, an increase of 14.1% from last year end despite the conversion chargeof 67p per share. Excluding the conversion charge, adjusted net assets pershare would have risen by 17.6%. Table 5: Net assets Year ended Year ended 31/03/07 31/03/06 £m £mNet assets at the beginning of the year 7,493.9 6,050.3Profit after tax 3,528.3 1,675.9Dividends paid (223.0) (238.9)Other (7.9) 6.6Net assets at the end of the year 10,791.3 7,493.9Deferred tax on investment properties - 145.0Deferred tax on net revaluation surpluses - 1,739.7Mark-to-market on interest rate hedges (23.6) 8.6Debt adjusted to nominal value (519.1) (375.3)Adjusted net assets at the end of the year 10,248.6 9,011.9 Drivers of performance A key driver of the increase in our net assets is the underlying performance ofthe combined portfolio, which includes our share of joint ventures (see Table6). This year, the combined portfolio saw a 10.6% valuation surplus. At 31March 2007 the portfolio was valued at £14.8bn (2006: £12.9bn). Part of theincrease in value is due to our net expenditure arising from purchases, salesand developments, with the balance comprising the valuation surplus. On the like-for-like portfolio, which allows for performance comparison ofincome growth and yield change over time, the valuation surplus for the year was£735.8m or 9.3%, of which £219.0m or 2.9% occurred in the six months since 30September 2006. As expected, we saw a notable slowing of yield shift in thesecond half of the year and this is reflected in the lower rate of valuationgrowth. It is in these circumstances that our value creation capabilities canprovide a point of differentiation, for example through leasing, development andrefurbishment activities. Table 6: Valuation and rental income summary Rental Rental income income for the for the Open market Open market year year Rental value at value at Valuation ended ended income 31/03/07 31/03/06 Surplus (1) 31/03/07 31/03/06 change £m £m % £m £m %Shopping centres and shops 2,829.4 2,591.9 7.8 162.1 152.3 6.4Retail warehouses 1,474.8 1,431.6 2.0 61.8 56.7 9.0London retail 932.6 853.1 7.2 47.2 43.4 8.8London offices 3,202.2 2,773.7 15.1 164.2 165.2 (0.6)Other 347.2 309.1 11.6 15.4 15.6 (1.2)Like-for-like investment 8,786.2 7,959.4 9.3 450.7 433.2 4.0 Portfolio (2)Completed developments 320.5 306.2 3.4 14.0 10.5 33.3Purchases 3,092.5 2,278.0 6.8 133.1 67.3 97.8Disposals and restructured - 930.4 - 33.9 67.8 (50.0)interestsDevelopment programme (3) 2,553.3 1,418.9 21.9 48.0 35.2 36.9Combined portfolio 14,752.5 12,892.9 10.6 679.7 614.0 10.7Adjustment for finance leases - - - (12.6) (13.2) 4.5Combined portfolio (4) 14,752.5 12,892.9 10.6 667.1 600.8 11.0 (1)The valuation surplus and rental income value are stated after adjusting forthe effect of spreading rents and rent free periods over the duration of leasesin accordance with IFRS but before restating for finance leases. (2)Properties that have been in the combined portfolio for the whole of thecurrent and previous financial periods. (3)Development programme comprising projects which are completed but less than95% let, developments on site, committed developments (approved projectswith the building contract let), and authorised developments (projects approvedby the Board, but for which the contract has not yet been let). (4)The combined portfolio includes our proportionate share of the assets andrental income of our joint ventures. Table 7 details the top six performing properties over £50m in each sector byrevaluation surplus together with an explanation of the key drivers of theirperformance. Yield shift played only a part in the creation of shareholdervalue. This analysis also demonstrates the strong contribution from Londondevelopments. Table 7: Top six performing properties over £50m for Retail Portfolio and LondonPortfolio Valuation ValuationRetail Portfolio surplus Description London Portfolio surplus Description % %Lewisham Shopping 21.1 Rental value growth and Dashwood House, EC2 64.7 DevelopmentCentre yield shift Gunwharf Quays, 15.5 Rental value growth and Bankside 2&3, SE1 61.3 DevelopmentPortsmouth yield shift Queslett Road, 15.3 Rental value growth and New Street Square, 41.9 DevelopmentBirmingham yield shift EC4 The Mall, 13.3 Reconfiguration and new Selborne House, SW1 27.7 Potential developmentStratford lettings opportunity High Street, 13.1 Impact of our adjoining New London House, 26.9 PotentialExeter development EC3 refurbishment opportunity Poole Road, Poole 11.0 Development Cardinal Place, SW1 26.8 Development Future drivers of performance A key driver of our performance is development. We have a large and profitabledevelopment programme. Including our share of joint ventures and thoseproperties completed and let in the year, our development programme produced avaluation surplus of 21.9% or £453.9m, of which £198.1m occurred in the secondhalf of the year. We have an estimated further spend of £1,162m on the projectscurrently underway which, when complete and fully let, will produce £218m ofannual income (at today's estimated rental value). Capital expenditure onproposed developments could total £597m if we proceed with these schemes, whichare held as part of the investment portfolio and have a current carrying valueof £329.3m. The figures given for capital expenditure represent the Group'sactual or forecast cash outlays on developments, excluding land values andcapitalised interest. Including these, the total development cost for the fulldevelopment pipeline is £3.8bn, of which £2.9bn relates to our currentdevelopment programme. Further details of our development pipeline are contained in the RetailPortfolio and London Portfolio sections of this review. Now that yield shift has slowed, rental value growth and minimising void levelsare again becoming more important determinants of performance. Rental values onour like-for-like portfolio increased by 4.9% over the year, and the netreversionary potential of the like-for-like portfolio at the year end was 10.4%compared to 7.7% 12 months ago. Void levels on our like-for-like Retailportfolio have reduced slightly over the year from 3.4% to 3.3%. On ourlike-for-like London offices, void levels have increased from 3.2% to 8.1%,which is attributable to pre-development properties where we have intentionallybeen seeking vacant possession. Cash flow and net debt Cash receipts during the year totalled £841.0m from investment portfolioproperty disposals, which included Devonshire House, W1, Regis House, EC4, andWhite City Retail Park, Manchester. In total, we invested £1,497.0m in ourproperties including £523.7m on investment property acquisitions, £416.5m byLand Securities Trillium (primarily Accor hotels £305.2m and Royal Mail £77.8m)and £429.4m on development. The development expenditure, which includes landacquisitions but excludes capitalised interest and our share of joint ventures(which expended £70.1m on shopping centre developments in Bristol and Cardiff),was spent principally on New Street Square, EC4, Bankside 2&3, SE1, in Londonand shopping centre developments in Exeter and Livingston. As part of ourstrategy to expand Land Securities Trillium into the PPP market, we spent£919.0m acquiring SMIF and the remaining 50% of Investors in the Community(IIC). Further details are given in the Property Partnerships section. From our joint ventures, we received a net £50.0m, largely as a result of anequalisation receipt from the St David's Limited Partnership. At 31 March 2007,the Group's net debt was £5,087.9m, some £1,402.0m higher than 2006 (£3,685.9m).The factors contributing to this increase in net debt are shown in Table 8. Table 8: Cash flow and net debt Year ended Year ended 31/03/07 31/03/06 £m £mOperating cash inflow after interest and tax 361.5 375.9Dividends paid (223.0) (238.9) Investment property acquisitions (523.7) (2,008.3) Property Partnerships property acquisitions (416.5) (6.8) Development and refurbishment capital expenditure (532.6) (338.3) Investment in properties (1,472.8) (2,353.4) Acquisition of SMIF and IIC (919.0) - Other capital expenditure (18.8) (26.9)Total capital expenditure (2,410.6) (2,380.3)Disposals (including Telereal in 2005/06) 869.8 972.6Joint ventures 50.0 133.8Other movements (49.7) (110.9)Increase in net debt (1,402.0) (1,247.8)Opening net debt (3,685.9) (2,438.1)Closing net debt (5,087.9) (3,685.9) Details of the Group's gearing are set out in Table 9, which includes theeffects of our share of joint venture debt, although the lenders to our jointventures have no recourse to the wider Group for repayment. Table 9: Gearing At At 31/03/07 31/03/06 % %Gearing - on book value of balance sheet debt 47.1 49.2Adjusted gearing * 54.7 46.9Adjusted gearing * - as above plus notional shareAdjusted gearing * - of joint venture debt 58.8 51.1 * Book value of balance sheet debt increased to recognise nominal value of debton refinancing in 2004 divided by adjusted net asset value. Financing strategy and financial structure Our financing strategy is to maintain an appropriate net debt to equity ratio(gearing). This ensures that asset-level performance is translated intoenhanced returns for shareholders while maintaining an appropriate risk rewardbalance. One feature of our REIT status is that the effective cost of our debthas risen significantly for our REIT qualifying activities. As we no longer paytax on these activities, we no longer benefit from the tax shield provided bythe tax deductibility of interest charges. This results in a higher effectivecost of debt, although it remains an attractive source of capital for us due toits ready availability and flexibility. However, in an environment of lowcapital returns and low to negative yield spreads (the difference between incomeon the investment and the cost of debt), underlying asset returns become a moreimportant determinant of performance than levels of financial gearing. As previously stated, the Group made significant investment in property relatedactivities, and net debt has grown by 38.0% from £3.7bn to £5.1bn. However,gearing has decreased from 49.2% to 47.1% due to the £2.3bn deferred tax releaseand the strong valuation growth of our portfolio. Looking ahead, we have to payour REIT entry charge (£315.0m), complete the final phase of the Accor hotelacquisition (£150m) and satisfy the capital expenditure requirements of ourdevelopment programme. Despite the increase in our year end net debt, our interest cover ratio,excluding our share of joint ventures, has fallen only marginally from 2.65times in 2006 to 2.43 times in 2007. Under the rules of the REIT regime, weneed to maintain an interest cover ratio in the exempt business of at least 1.25times to avoid paying tax. As calculated under the REIT regulations, ourinterest cover ratio for the exempt business for the three months to 31 March2007, the period for which we were a REIT in this financial year, wasapproximately 2.25 times. As well as having the right level of debt in the business, we also need toensure that we have a financing structure that is both flexible and costeffective. Both of these issues were addressed in the 2004/05 year with theintroduction of a new secured funding structure. Under this structure, webenefit from a lower cost of finance by utilising the credit strength of ourinvestment portfolio without the more onerous restrictions of individuallycollateralised obligations. Operational flexibility is maintained throughprovisions which allow us to buy and sell assets, without restriction, andundertake development. At 31 March 2007, our debt investors had security over£11.6bn of investment properties in this structure against loans of £5.1bn,representing a loan to value ratio of 44.0%. As part of the funding structure, a committed revolving credit facility providesus with the financial flexibility to draw and repay loans at will, and reactswiftly to investment opportunities. In August 2006, the Group replaced itsexisting five year £2.0bn revolving credit facility with a new seven year £1.5bnfacility. The new facility carries lower margins, reduced commitment fees, areduced and more focused bank group and extends the maturity by nearly fouryears. In October we also took the opportunity to diversify further and reducethe cost of our short-term debt by establishing a £750m Euro Commercial PaperProgramme. During the course of the year, we increased the size of our Irish listed Noteprogramme from £4bn to £6bn and issued two further Sterling bonds. The firstwas an issue of £300m with a fixed coupon of 4.875% and an expected maturity of2023. The second was a £500m 5.125% fixed rate bond with an expected maturityof 2034. As a result of our flexible funding structure both deals were pricedwithin four working days of announcement. In December 2006, we arranged a one year acquisition facility with an option toextend it by a further year, to provide funding for the purchase of SMIF. Inthe same month Land Securities Trillium refinanced its limited recourse DWP bankloan with a new secured facility which offers a lower margin and increasedoperational flexibility. The new facility matures in 2017 to coincide with theend of the underlying DWP contract. At 31 March 2007, Land Securities' total borrowings (including joint ventures)amounted to £6,096.0m, of which £183.0m was drawn under our £1.5bn secured bankfacility and £71.0m related to finance leases. Committed but undrawn facilitiesamounted to £1,319.0m. The Group also has £238.5m of uncommitted facilities.The majority of debt due in less than one year relates to drawings under the£1.0bn committed acquisition facility. Hedging We use derivative products to manage our interest rate exposure, and have ahedging policy which requires at least 80% of our existing debt plus our netcommitted capital expenditure to be at fixed interest rates for the coming fiveyears. Specific hedges are also used in geared joint ventures to fix theinterest exposure on limited recourse debt. At the year end we had £1.8bn ofhedges in place, and our debt was 96% fixed. Consequently, based on year enddebt levels, a 1% rise in interest rates would increase full year interestcharges by less than £3m. Future funding The Group's modest gearing levels and robust interest cover provide significantdebt capacity to meet its projected capital requirements. Market capacityremains in Sterling and the Group has the flexibility, if necessary, to tapother markets such as the Euro. With £1.3bn of committed but undrawnfacilities, the Group is confident that it will be able to finance its plannedcapital commitments. Taxation As a consequence of the Group's conversion to REIT status, income and capitalgains from our qualifying property rental business are now exempt from UKcorporation tax. This has had a major impact on our tax position, and for theyear, we had a net tax credit of £1,549.2m (2006: £683.3m charge) comprised ofthe following items: • £99.4m corporation tax and £345.6m deferred tax on income and gains arising in the nine months to 31 December 2006 and on non-exempt (residual) income and gains for the three months to 31 March 2007; and • Two exceptional items: the £315.0m REIT conversion charge and a £2,309.2m release of deferred tax on revaluation reserves, capital allowances and other temporary differences which will no longer be taxed when they reverse as a consequence of our REIT status. Excluding the exceptional items and adjusting for prior year tax credits andnon-allowable IFRS bond amortisation, the effective cash tax rate on our profitbefore revaluations, joint venture income and disposals was 17.6% (2006: 23.2%).This reduction is largely due to REIT tax exemption for the final quarter. Pension schemes The Group operates a number of defined benefit pension schemes which are closedto new members. At 31 March 2007 the schemes had a combined deficit, net ofdeferred tax, of £5.3m (2006: £4.5m). During the year we made a further specialcontribution of £1.5m (2006: £1.5m) to the principal defined benefit pensionscheme and we are maintaining our enhanced contribution rate to address thisrelatively small deficit. Retail Portfolio Introduction Our Retail Portfolio business represents 49.0% of the combined portfolio andproduced £273.0m of the Group's underlying operating profit. We own 1.8 millionsq m of retail accommodation including 29 shopping centres and 31 retail parks.This represents a core market share of 5.8% and we have approximately 1,700occupiers across this portfolio. Many of our retail properties form the centralshopping districts of major cities and towns across the UK and we estimate that300 million visits are made by consumers to our retail destinations each year.We are also investing £1.1bn to create the next generation of retail locationsthrough a 255,000sq m development pipeline. The retail market The overall economic backdrop is favourable and the UK has seen continuinggrowth in like-for-like retail sales, which were 3.5% higher in the quarter to31 March 2007 compared with the same period in 2006. Absolute sales growthcontinues at 5.7% per annum. For us this is the most important measure ofretailer confidence since it includes the effect of retailers taking on new orimproved floor space to grow market share. Over the past year the winners versus losers trend, identified by us some timeago, became increasingly apparent. Supermarkets and internet retailers havegenerally been the winners along with some major store groups, such as Marks andSpencer, John Lewis and Primark. Smaller retailers have found it harder tocombat rising costs and price deflation, particularly in sectors impacted byonline competition. The popularity of out-of-town shopping continues, driven byconvenience, accessibility and plentiful car parking. The bulky goods sector,which has been depressed for two years, is now showing signs of improving trade. Across our like-for-like portfolio we saw rental income growth of 6.5% over theyear and, in total we let retail units with an annual rent roll of £29.7m -equivalent to 8.8% of our current retail rent roll. This was in some 350transactions involving approximately 180,000sq m of retail accommodation. Thisdemonstrates an active leasing market and it has resulted in a reduction in thevoid levels across our like-for-like Retail Portfolio over the year. On ourdevelopment projects, demand remains good and the trend of increasing leaseincentives such as rent free periods has now stabilised. Following several years of strong favourable yield shift, the past 12 monthshave, as expected, seen the investment market for retail property returning toequilibrium. After a period of convergence between prime and secondary yields,we are now starting to see the yield gap widening again particularly in theretail warehouse sector. Our strategy We will seek to strengthen our position as a leading owner of retail propertythrough: • Investment in dominant retail assets and application of our skills to create value • Development • Provision of market leading levels of customer service and property management Our focus this year has been more on development and asset managementactivities, rather than on acquisitions and disposals. However, towards the endof the financial year and following the elimination of latent capital gains taxliabilities upon REIT conversion, we sold a number of assets where we felt thatopportunity to grow value was restricted. In the year to 31 March 2007, we made£62.8m of acquisitions and sold £417.1m of properties (based on the net effectof asset transfers into the St David's partnership), and since the year end wehave sold or exchanged contracts for a further £233.5m of properties. In a yearof consolidation, we restructured our property management activities to allow usto improve service delivery across the portfolio. We also invested £286.6m(2006: £76.9m) in the development programme, further details of which arecontained later in this review. Our performance The valuation surplus on our Retail Portfolio was £368.1m or 5.4% over the year.However, the slowing of growth rates in recent months is evident from the factthat the valuation surplus in the second half of the year was only 0.3%. Theselower levels of performance compared to the prior year primarily reflect theimpact of reduced yield shift and also lower levels of like-for-like rentalvalue growth of 1.7% (2006: 4.3%). Table 10: Retail Portfolio valuation and performance summary 31/03/07 31/03/06Total retail*Combined portfolio valuation £7,226.2m £6,899.1mLike-for-like investment portfolio valuation £4,561.1m £4,254.2mRental income £237.8m £223.2mGross estimated rental value £266.5m £258.9mVoids by estimated rental value £8.7m £8.8mGross income yield 5.0% 5.0%Shopping centresCombined portfolio valuation £4,157.9m £3,823.3mLike-for-like investment portfolio valuation £2,537.8m £2,318.8mRental income £147.5m £137.5mGross estimated rental value £163.3m £154.8mVoids by estimated rental value £5.4m £4.4mGross income yield 5.5% 5.6%Retail warehousesCombined portfolio valuation £2,306.9m £2,314.6mLike-for-like investment portfolio valuation £1,474.8m £1,431.6mRental income £61.8m £56.7mGross estimated rental value £71.8m £71.0mVoids by estimated rental value £1.3m £1.9mGross income yield 4.3% 4.1% Combined portfolio and by reference to the Reconciliation Tables (in theBusiness Analysis Section). * Retail includes shopping centres, retail warehouses, shops outside London,shops held through the Metro Shopping Fund LP, regional offices and sundry otherproperties outside London. Future growth will come from our significant reversionary potential of 10.9%, asrent reviews are settled, and from rental value growth. In mature centres andparks, rental value growth can only be achieved if void levels are low and so weare particularly pleased that our strong performance on leasing (£20.0m of rentsecured excluding development) has kept voids to 4.6% in our shopping centreportfolio and reduced them to 1.6% in our retail warehouses. Over the past few years we have restructured the shopping centre element of ourretail portfolio to respond to longer-term trends in the retail markets,particularly retailers' desire for more efficient retail units. Over the comingyear we will be looking to restructure our retail park portfolio, now that REITstatus has eliminated our latent capital gains tax position, which haspreviously inhibited trading of this portfolio. We have already sold two retailparks at Erdington, Birmingham and White City, Manchester for an aggregate of£127.2m and, since the year end, we have exchanged contracts on two more retailwarehouse assets for £40.1m. Application of skills to create value in investment properties Across the shopping centre portfolio, we focused on adding value through assetmanagement activities. At Gunwharf Quays we have driven financial performancethrough innovative consumer marketing events, a long-term approach to tenant mix(where the optimum balance does not always lead to the highest level of rent)and exemplary on-site customer service. During the year 10 new lettingsimproved the overall attraction of the centre. Through Gunwharf Quays, we havegained invaluable experience of Factory Outlet Centre model, and are now rollingout these management techniques to Hatfield Galleria and the recently openedBanbridge in Northern Ireland. At our shopping centre in Stratford we are repositioning the tenant mix of thescheme to optimise trading in the lead up to the Olympics and beyond. Our assetmanagement has improved both the fashion and food offer, and rental growth hasbeen immediately achieved, with rental values up 11.8% over the year. In our retail warehouse portfolio, we continue to reconfigure space to providethe right size of units for retailers. In Edmonton we have agreed to relocateWickes into the former Courts store and we have refurbished it for them. Wehave secured planning consent for the redevelopment of the former Wickes intofive units of 700sq m, each with mezzanines, and are currently discussing termswith potential occupiers. As part of the refurbishment of our scheme in Poole,we have exchanged contracts with Homebase to surrender their existing lease,which had five years to run, for a new 20 year lease. Homebase will completelyre-image the external elevations to match the new scheme design and extend intothe former Comet unit. Comet also relocated within the scheme. As demonstrated by the examples above, we aim to create a strong platform fromwhich our retail customers can trade profitably and an attractive environmentfor shoppers visiting our properties. It is our responsibility to make sure thatour retail environments remain safe and clean and to provide relevant promotionand marketing activities. To some extent we can assess the success of theseactivities through the number of visitors to the portfolio, which is measuredfor us by a third party provider and then compared to a national index. In theyear to December 2006, the number of visitors to our portfolio increased by1.0%, as compared to a 5.1% fall in the national index. This increase canpartially be explained by the completion of our development in Canterbury, thesuccess of which is reflected in much higher visitor numbers. It can also beexplained by the success we have had in identifying and acquiring those centreswhich provide a rewarding experience and therefore attract a greater number ofvisits. We also work closely with our retailers to monitor sales trends at each of ourcentres. Last year we introduced a new trading index at the St David's Centre.This innovative use of technology provides retailers with weekly trading trendsacross a number of categories, so that they can compare their trading withcompetitors in the Centre. It also provides feedback on consumer spendingpatterns. Development We have continued with our extensive development programme and have made goodprogress. We have achieved our letting targets for all our developments onsite, achieving 82,300sq m of lettings during the year, with a further 22,700sqm under offer or in solicitors' hands. This represents future cash rentalincome of £15.3m (our share). In Exeter we have had a very encouraging response from both retailers andcustomers to the first phase of Princesshay which opened in April. Thedevelopment reflects our objective to create vital and vibrant mixed usedestinations and is framed around high quality public spaces, adopting aninnovative design approach to produce a number of individual and distinctivebuildings. In a challenging market we are pleased to now have some 80% of thescheme let and a further 5% in solicitors hands, including a strong line up ofnational retail brands and restaurants. To create a point of differentiationand a local identity, we have also reserved an element of the scheme forindependent retailers. The scheme is scheduled for completion in autumn 2007. Cabot Circus in Bristol, which we are developing in partnership with Hammerson,is proceeding on programme and is due for completion in September 2008. It hasa wide range of uses and the tenant mix has been carefully planned to createareas within the scheme with a distinct appeal, such as the mid to upper marketin Quakers Friars with lettings to Harvey Nichols and Ted Baker. The scheme isnow 47% let with a further 8% in solicitors hands. At St David's 2 in Cardiff, which we are developing in partnership with CapitalShopping Centres, we have started on the main building contract after a seriesof demolition and enabling works, and completion is due in autumn 2009. Thescheme is to be anchored by Debenhams and a 24,150sq m store for John Lewis,their first in Wales. In addition to our committed schemes we have recently submitted a planningapplication for an extension to Buchanan Galleries, Glasgow. This will beundertaken in partnership with Henderson Global Investors and will double thesize of the scheme to 120,000sq m. We are also conducting feasibility studies for a number of other major schemesincluding a substantial refurbishment of St John's Centre, Liverpool, and asecond phase of development in Corby. Last year we reported that we had agreed a forward purchase of a retail parkdevelopment site in Banbridge, Northern Ireland, immediately adjacent to ourfactory outlet development. A planning application for 33,450sq m has now beensubmitted for the retail park scheme and a conditional land sale deal signedwith Tesco for approximately 40% of the site. We outline our development pipeline in Table 11. Table 11: Retail development pipeline at 31 March 2007 Property Estimated/ actual Description Size Planning Letting completion Cost of use sq m status status date £m SHOPPING CENTRES AND SHOPS Developments approved and those inprogress Cabot Circus, Bristol - The Bristol Retail 83,610 43% Sep 2008 215Alliance - a limited partnership Leisure 9,000with Hammerson plc Offices 28,000 Residential 18,740 Christ's Lane, Cambridge Retail 5,800 84% Dec 2007 27 Residential 1,350 Princesshay, Exeter Retail 37,360 76% Jul 2007 160 Residential 7,200 Willow Place, Corby Retail 16,260 34% Oct 2007 34 St David's, Cardiff - St David's Retail/ 89,900 7% Sep 2009 294Partnership- a limited partnership leisurewith Capital Shopping Centres Residential 16,500 The Elements, Livingston Retail 32,000 17% Sep 2008 130 Leisure 5,670 RETAIL WAREHOUSES Developments, let and transferred orsold Kingsway Retail Park, Dundee, Retail 8,650 64% May 2004 16 Phase II Developments completedCommerce Centre, Poole Retail 19,100 76% Aug 2006 22 Developments approved and those inprogress Maskew Avenue, Peterborough Retail 13,380 91% Sep 2007 32 Thanet Leisure, Thanet Leisure 8,970 100% Aug 2007 24 Proposed developmentsAlmondvale South Phase ll b, Livingston Retail 4,180 PR 2008 Cost (£m) refers to the estimated capital expenditure required to develop thescheme from the start of the financial year in which the property is added toour development programme. Finance charges are excluded from cost. Floor areasshown above represent the full scheme whereas the cost represents our share ofcosts. Letting % is measured by ERV and shows letting status at 31 March 2007. Trading property development schemes are excluded from the developmentpipeline. Planning status PR - Planning Received London Portfolio Introduction Our London Portfolio represents 50.6% of the combined portfolio and produced£270.5m of the Group's underlying operating profit. We own 929,000sq m ofoffice accommodation and 101,000sq m of retail floorspace. Our office portfoliorepresents approximately 4.5% of the total London office floorspace with over400 occupiers accommodating more than 50,000 people. We are investing £2.7bn ondevelopment, to meet demand for effective modern business accommodation. London office market The London office market has been historically more volatile than the retailmarket. This reflects its economy and particularly its dependence in the Cityon the financial services industry. It is also affected by the supply of newdevelopment stock. Market letting conditions today are favourable with lowervacancy levels across the core markets, as we anticipated last year. The WestEnd is demonstrating significant under supply and the City is also now undersupplied and will remain so for the short-term as limited new office developmentstock is delivered. We are cautious about the future supply of offices in theCity of London in the medium-term and will be monitoring new development startsover the next 12 months, although we are confident in the timing and scale ofthe development programme we have under way already. We believe theopportunities in the West End for new development are more limited and thereforeexpect continuing robust market conditions. London investment market The trading of investment properties in London has been at an historic high,with yields reducing and capital values rising significantly during the year.There is a sense of 'overheating' in some market segments but, for the timebeing, prime London assets continue to attract buyers at strong prices. Our strategy Four years ago we set our strategy for the London Portfolio to address the morecyclical nature of the operating environment in London. We stated that we wouldseek to create value through: • Focus on geographic areas of activity - clustering • Development activity, particularly mixed use • Active asset management • Leveraging strong relationships with occupiers In the past 12 months we acquired £478.7m and sold £480.5m of property,including the £275.3m sale of Devonshire House, W1. We made substantial progresson our development programme; spending £315.7m on development, started 72,300sqm of new projects, achieved 60,700sq m of lettings and submitted planningapplications for a further 89,700sq m of commercial accommodation. Our performance Our London Portfolio grew in size over the year from £5.9bn to £7.5bn, showing a16.2% valuation surplus. Our development activities showed a £425.8m or 28.4%surplus and our like-for-like investment holdings a £476.3m or 13.4% surplus. Table 12: London Portfolio valuation and performance 31/03/07 31/03/06London Portfolio*Combined portfolio valuation £7,461.3m £5,932.4mLike-for-like investment portfolio valuation £4,160.1m £3,645.8mRental income £209.2m £206.2mGross estimated rental value £236.4m £218.9mVoids by estimated rental value £16.2m £6.2mGross income yield 4.3% 5.2%London officesCombined portfolio valuation £6,081.8m £4,788.2mLike-for-like investment portfolio valuation £3,185.6m £2,760.1mRental income £162.7m £163.8mGross estimated rental value £186.0m £169.9mVoids by estimated rental value £15.2m £5.4mGross income yield 4.3% 5.4%London shopsCombined portfolio valuation £1,182.6m £1,053.8mLike-for-like investment portfolio valuation £879.2m £805.3mRental income £42.3m £38.6mGross estimated rental value £45.2m £44.4mVoids by estimated rental value £0.9m £0.7mGross income yield 4.4% 4.8% Combined portfolio and by reference to the Reconciliation Table (in the BusinessAnalysis Section). \* The London Portfolio includes London offices, London shops (with the exceptionof shops held through the Metro Shopping Fund LP) and sundry other properties inLondon Unique opportunities exist within our portfolio to exploit London'sattractiveness as a place to visit and live. We are looking to redevelop andimprove the environment in key areas of the West End and Bankside/South Bankwhich will not only assist the performance of our commercial holdings but alsodrive additional value from residential and retail development. This diversityhas strong defensive qualities against a cyclical office market. Future growth in income comes from rent reviews, lease renewals and newlettings. During the year we achieved lease renewals and new lettings (includingdevelopments) for £26.9m of income and settled 36 rent reviews achieving orexceeding estimated rental value. We have managed to reduce the over-rentedelement of the portfolio from 6.2% to 2.0%, predominantly as a result of ourinvestment activities and as a result of the strong rental growth across all ourcore markets. The reversionary potential of the London Portfolio has thereforeimproved from 6.7% to 8.6%. Void levels have increased, but this is a temporaryissue explained by the emptying of major holdings prior to redevelopment.London retail like-for-like is 14.6% reversionary and void levels remain low at2.0% on a like-for-like basis with new developments offering the prospect ofgood growth in the future as new locations develop and attract more customers. In 2003 we started a development programme which has delivered some £765m ofvalue during this time. This was in anticipation of the improved marketconditions that we foresaw in the London commercial property markets. From 2004we started a substantial restructuring of the portfolio, which has seen theacquisition of £1.5bn of investment properties let at low rents averaging£278.2sq m. We have now commenced a sales programme for selected buildingswhere we are able to secure a premium in today's strong investment market. Active asset management and recycling of capital Across the London Portfolio, we focused on adding value through asset managementactivities. Two examples of this are: Devonshire House, W1 Devonshire House had been in Land Securities' portfolio since 1955, but we tookthe decision to sell it last year. We assessed the demand from investors forpremium large scale property assets to be reaching a peak during the second halfof 2006. Devonshire House needed significant refurbishment and capitalexpenditure, so we undertook to refurbish one floor in order to demonstrate thestrength of demand in the underlying occupational market and to assist withselling the asset. We secured £1,184 per sq m rent on the refurbished floor andachieved a significant premium (21%) to book value on the disposal. Dashwood House, EC2 Dashwood House is a recognisable City landmark which was reaching the end of itsoccupational leases (2010/11). While full redevelopment was a possibility, ourapproach has been to secure early vacant possession and accelerate a planningapplication for a major refurbishment including some additional office floors.By adopting this strategy we have targeted completion at an earlier date whichwe expect to be at a strong point in the City occupational market. Focus on geographic areas of activity - clustering We have been developing this policy for a number of years. The principle is todevelop and invest in geographic locations where the performance of theinvestment holdings can benefit from active asset management or development inthe immediate locality. We have benefited from significant performance of ourassets around New Street Square as well as a strong performance of thedevelopment itself. It has also enabled us to hold constructive discussionswith occupiers in the area to manage their medium and long term occupationalrequirements using our substantial holdings. The extent of our ownerships in Victoria Street and the immediate vicinity haveenabled us to bring forward two significant redevelopment proposals. We haveachieved this in a timely manner while managing the risk these assets pose asdominant holdings in the area. In addition we have been able to relocateoccupiers within the portfolio, for example the Department for ConstitutionalAffairs shortly to become the Ministry of Justice, will be moving to 50 QueenAnne's Gate from our holdings on Victoria Street. Meanwhile the redevelopmentof Cardinal Place has demonstrated the attractiveness of comprehensiveredevelopment providing a mix of uses and open space. It has also secured somevery high profile occupiers such as 3i, P&O, Wellington Management and Microsoftin a location not previously recognised for this type of occupier. We expectthis to have an ongoing benefit when redeveloping and re-leasing accommodationin this location. The retail accommodation at Cardinal Place has demonstrated a strength of demandfor good quality units and for food and beverage outlets. We anticipate thiswill continue, given the volume of people passing through Victoria Station(approximately 100 million per annum). We have also invested significantly on the South Bank around our developments atBankside 1&3, the cultural hub of Tate Modern and the new residential activitythat is ongoing. Development activity including a focus on mixed use We have continued to deliver substantial value from our development activitieswith a valuation surplus of £425.8m over the 12 months. We believe we haveachieved our objective of delivering our developments early in the cycle toensure lease-up and strong performance. Our developments have also largely beenmixed use, which helps to mitigate risk exposure to any one particular sector. Within the next 12 months we will complete significant amounts of office floorspace at Bankside 2&3 in Southwark, New Street Square in Mid-town and WoodStreet in the City. During the development phase we have been securingpre-lettings and pre-commitments on a progressive basis with a view to improvingreturns while managing risk. We now have approximately 80% of this officefloorspace either pre-let or in solicitors' hands. We have also been able tosecure good rental growth in these developments as the leasing programme hasprogressed. We have also started One New Change, EC4, which is a mixed use scheme of19,830sq m retail and 31,660sq m office accommodation. Planning consents are important to the underlying value of the assets we hold inour investment portfolio. We have secured a number of new planning consentsthis year including: • Dashwood House We have now started our scheme at Dashwood House, EC2, as described above with aview to completing it by November 2008. • Park House Park House, Oxford Street, W1, is awaiting the outcome of a Judicial Review.Its associated development at Wilton Plaza will be providing student housing andaffordable housing together with a small component of private residential flatswhich will be completed in the early part of 2009. • 20 Fenchurch Street The scheme at 20 Fenchurch Street, EC3, received planning consent from the Cityof London in November last year. Unfortunately it was called in for a planninginquiry by the Secretary of State, despite no stakeholders or statutoryconsultees referring it to the Minister. The planning inquiry has now been heldand we await the Planning Inspector's decision. These schemes are innovative in terms of design and environmental features andattractive in terms of commercial floor space layout and the mix of usesappropriate to their locations. We have also advanced our plans for Victoria Transport Interchange and VictoriaMasterplan which will be a coordinated yet comprehensive redevelopment of asignificant number of our holdings in Victoria over the next decade. We believeVictoria is an area of the West End office market with potential for significantgrowth and it also offers substantial retail and residential potential. It isone of the busiest transport nodes in London and it is adjacent to one of thehighest value residential districts. We are confident that Victoria will becomea core market within the West End over the next 10 years providing exciting newand prestigious residential and commercial floor space. Table 13: London Portfolio development pipeline at 31 March 2007 Estimated/ actual Description Planning Letting completion CostProperty of use Size status status date £m CENTRAL AND INNER LONDON PROPERTIESDevelopments approved and those in progressCardinal Place, SW1 Offices 51,130 93% Jan 2006 270 Retail 9,420 100% Bankside 2&3, SE1 Offices 35,550 * Aug 2007 121 Retail/ 3,170 10% leisure 1 Wood Street, EC2 Offices 15,020 100% Sep 2007 103 Retail 1,500 New Street Square, EC4 Offices 62,340 61% Apr 2008 312 Retail 2,980 50 Queen Anne's Gate, SW1 Offices 30,140 100% Dec 2007 127 10 Eastbourne Terrace, W2 Offices 6,150 May 2008 23 Dashwood House, EC2 Offices 13,870 Nov 2008 62 Retail 740 One New Change, EC4 Offices 31,660 Sep 2010 340 Retail 19,830 1% Proposed developments Park House, W1 Offices 15,550 PI 2010 Retail 8,470 Residential 11,890 20 Fenchurch Sreet, EC3 Offices 54,810 PI 2011 Retail 560 * 100% of the office space was placed in solicitors hands after 31 March 2007 Cost (£m) refers to the estimated capital expenditure required to develop thescheme from the start of the financial year in which the property is added toour development programme. Finance charges are excluded from cost. Floor areasshown above represent the full scheme whereas the cost represents our share ofcosts. Letting % is measured by ERV and shows letting status at 31 March 2007.Trading property development schemes are excluded from the developmentpipeline. Planning status PI - Planning Inquiry Property Partnerships Introduction A year ago we stated that Land Securities Trillium was positioned for a phase offurther growth. This happened in the second half of the financial year underreview. As a result this business has grown from 3.3 million sq m to 4.8million sq m of floorspace, with eight clients and 105 PPP contracts. We nowprovide accommodation services to more than 450,000 people. Property Partnership markets Property Partnership markets encompass both the property outsourcing and PPPmarkets. Our target markets are public and private sector organisations and weestimate the potential property values which could be accessed through PropertyPartnership contracts at in excess of £100bn, excluding any leasehold propertywhich may also be transferred in a property outsourcing contract. A year ago we described the changes that have taken place in the PropertyPartnership markets and the actions we were taking in response to these changes.In summary, we recognised that the market for major property outsourcingprojects, which began in earnest in 1998 with the DWP contract, was constrainedin terms of the number of organisations with portfolios suitable for a fulloutsourcing contract. In recognition of this we evolved our business model torespond to our clients' need for smaller, tailored property outsourcingcontracts, such as those undertaken by the DVLA and Norwich Union. We alsorecognised that PPP projects are a form of property outsourcing. As a result wedecided to focus on this area, in particular on defence, education and communityassets. The PPP market was established in 1992 and has since grown to a substantial andincreasingly global method for Governments to procure capital projects foraccommodation and infrastructure. In the UK alone, nearly £50bn of projectshave been completed and some £5bn per annum of new projects are anticipated.This market is expanding in Continental Europe and shows strong growth potentialand demonstrate good resilience to downturns in the economic cycle. Our strategy Our strategy remains the same: • Access new opportunities for property partnerships in existing and new markets • Grow our business with existing and new clients • Lead innovation in the outsourcing industry Through the acquisition of SMIF and IIC, Land Securities Trillium has positioneditself as the clear market leader in the UK and has unrivalled capability in theprimary and secondary PPP markets (the primary market involving bidding for newcontracts and the secondary market being the acquisition of existing contracts).At the same time, Land Securities Trillium has remained at the forefront ofthe property outsourcing market as demonstrated by the Royal Mail and Accortransactions and, our appointment as Preferred Bidder on the MoD DefenceTraining Review Package 1 in the last quarter of this financial year. We are now seeking to exploit the advantages of scale and diversity created overthe past year to access UK and Continental European PPP markets. In the UK,primary bidding activity for new contracts will focus upon sectors where we havecompetitive advantage, for example the Building Schools for the Futureprogramme, using the service skills within our organisation. In Europe, we willtarget countries where we can both quickly acquire diversified portfolios ofexisting contracts at attractive returns and look over the medium-term todevelop our partnering and primary bidding strategies. All our targets have common characteristics. They generate high prospectivecashflows that: • Have good credit quality - being generated from either an investment grade or Government counter-party • Are often inflation linked • Have low volatility - reflecting performance and availability risk which Land Securities Trillium is very competent at managing We are very pleased with the progress we have made to deliver against ourstrategy. Our new contracts The Land Securities Trillium business has evolved substantially in the pastyear, developing from being market leader in property outsourcing to beingmarket leader in both property outsourcing and the PPP market. The second half of the year was notable for the high level of acquisitions andnew business activity. We made acquisitions totalling £1.4bn, including the£910.5m acquisition of SMIF, the £439.0m acquisition of the Accor hotelportfolio (including eight properties yet to complete), the £71.1m acquisitionof Royal Mail and with our purchase of the remaining 50% of IIC for £8.5m. OurMetrix joint venture with QinetiQ was appointed preferred bidder on Package 1 ofthe Defence Training Review and provisional preferred bidder on Package 2. • SMIF Land Securities Trillium completed the acquisition of SMIF in February 2007.Togther with our outright acquisition of IIC, the joint venture set up with MillGroup in 2006, this establishes us as the leader in the UK market for PPPprojects. We have equity and/or management interests in 105 projects and offera market leading bidding and business development capability across key targetsectors of community infrastructure. This includes education, health, securityand general accommodation. At the time of acquiring SMIF we stated ourintention to divest the underlying projects by transferring them to a fund andbringing in third party investors, while maintaining a minority interest. Wehave appointed an Investment Bank to execute this strategy and anticipate itssuccessful implementation by the end of 2007. • Metrix In January 2007, the Secretary of State for Defence announced that the Metrixconsortium was awarded preferred bidder status for Package 1 (Technicaltraining) and provisional preferred bidder status for Package 2 (Non-technicaltraining) of the Defence Training Review (DTR) programme. The DTR will providethe best possible specialist training for all three Armed Services by creatingNational Centres of Excellence, through a programme of investment,rationalisation and modernisation. We are a 50% shareholder in the successful Metrix consortium with leadingdefence service provider QinetiQ and we will also provide full constructionmanagement and facilities management services to Metrix. This project will beone of the largest PPP projects yet undertaken and involves the building,maintenance and operation of a new Defence Training Academy at RAF St Athan inSouth Wales. Improvements and investments also planned at a number of othertraining sites. • Accor Hotels In February 2007, we agreed terms for the purchase of 30 Ibis and Novotel hotelsin the UK from Accor, the fourth largest hotel chain in the world. Theconsideration was £439m with a commitment to contribute £35m towards improvementworks over four years and to assist Accor in locating and acquiring new sites.The current hotels, primarily in major city centre locations, are leased back toAccor for 84 years with 12 yearly tenant break clauses. The rent is set as apercentage of the hotels' turnover. We also provide maintenance services forthe external fabric of the hotels. The partnership model adopted here isimportant to Accor's expansion strategy and exemplifies our property partnershipapproach. • Royal Mail In March 2007, Land Securities Trillium completed the acquisition of a portfolioof 295 properties from Royal Mail for a net consideration of £71.1m. Thisincludes 114 vacant, surplus leasehold properties on which we have taken fullrisk transfer and operational responsibility, 176 freehold properties occupiedby Royal Mail under a 15 year leaseback, and five investment properties notoccupied by Royal Mail. Royal Mail occupies only the space it requires in thesebuildings and we manage both sub-tenants and vacant space. This transactionrepresents just 3% of the operational space of Royal Mail and is a key elementin their drive to increase efficiency, with scope to grow the partnership infuture. • Workplace 2010 Land Securities Trillium has reached the Best and Final Offer stage of theWorkplace 2010 procurement. This is a 20 year full property outsourcingcontract by the Northern Ireland Civil Service (NICS), involving significant newbuild and refurbishment across an initial estate of 270,000 sq m (77properties), with potential for expansion at phase 2. This programme is a majorelement in the adoption of modern working practices by NICS. If successful,initial investment would be up to £300m in freehold purchases and capital spendon building improvements. Our performance Land Securities Trillium produced an underlying operating profit of £98.8mexcluding IIC (2006: £96.6m). This performance reflected our expectations forgrowth in profits across all contracts except the DWP. Table 14: Land Securities Trillium financial results Year ended Year ended 31/03/2007 31/03/2006 £m £mContract level operating profit- Barclays 3.3 2.5- BBC 2.8 0.5- Driver and Vehicle Licensing Agency (DVLA) 1.7 1.0- Department for Work and Pensions (DWP) 81.0 97.7- Norwich Union 9.2 5.0- Telereal II* 16.1 6.9- Accor 1.5 -Bid costs (2.8) (7.4)Central costs (14.0) (9.6)Underlying operating profit 98.8 96.6Profit on sale of non-current properties 7.5 1.0Net (deficit) / surplus on revaluation of investment (13.6) 1.9propertiesProfit on disposal of joint venture (Telereal) - 293.0Segment profit 92.7 392.5Share of loss from Investors in the Community (IIC) joint (3.0) -ventureDistribution received from Telereal - 11.7 * The operating profit for Telereal II for the year to 31 March 2006 related toa six month period only. The reduction in DWP profitability is in line with expectations and reflects thefull year impact of prior year vacations plus further vacations during 2006/07in accordance with their contractual entitlement of 220,500sq m. The improvedprofit contributions from both DVLA and Norwich Union reflect the increases inincome as more space is occupied by our clients as further phases ofrefurbishment work are completed. The BBC contract concluded in June 2006, andTelereal II reflects a full year's result. One month of Accor profitability isincluded. The increase in central costs primarily reflects the increase in overheadsassociated with new business and also the costs associated with theimplementation of new systems. The majority of the bid costs associated withDTR were incurred in the prior year. The deficit on revaluation reflects theimpact of stamp duty and other purchase costs on the Accor and Royal Mailportfolios which were acquired close to the year end. The IIC losses reflectthe high level of new business activity, much of which continued over the yearend, which is expensed prior to selection as preferred bidder. Land Securities Trillium business model We have integrated IIC and the management of our SMIF investments into LandSecurities Trillium and organised the business into four core operating areas,supported by Finance and Human Resource functions. These four areas are: Origination We now have unrivalled business development capability in both the PPP andproperty outsourcing markets. The focus is on long-term customer focusedpartnerships generating high quality cash flows with significant enhancementprospects through our asset management skills and the application of economiesof scale. The opportunities could be in either the primary market, in which weare currently active in bidding on the NICS outsourcing contract and variousBuilding Schools for the Future projects, or the secondary market. The keyareas of focus are health, education and office accommodation, but we willconsider assets in other sectors in the UK and continental Europe that meet ourreturn criteria and where we can deploy our expertise. Partnerships delivery The role of partnerships delivery is to provide excellent customer serviceacross all elements of our offering and to manage our operational risks. Ifachieved effectively, this leads to strong partnering relationships in whichcustomers are keen to expand the services and risks we manage on their behalf,secure in the knowledge that we are providing high quality, value for moneysolutions. Over the past 12 months we have again achieved very high levels of customersatisfaction in our DWP operation, securing a 91% rating, while continuing towork in a flexible and responsive manner with this customer to help it meet itsbusiness challenges. As predicted, the rate at which DWP has utilised its freeflexible vacation allowance has continued to increase over the past 12 months.In all, DWP vacated 220,500sq m during the year, and over the same period wemitigated our exposure by letting or otherwise disposing of 148,800sq m ofvacant space from across our portfolio. In other key contracts, we are continuing to deliver our successfulrefurbishment project at the Norwich Union headquarters. At the DVLA in Swanseaour relationship has grown to the extent that we have now more than doubled thecapital we will invest in refurbishment and new build projects. These projectsare playing their part in transforming the way in which the DVLA carries out itsbusiness. We continue to focus on the environmental aspects of our business and we werevery pleased to retain our ISO:14001 accreditation for the EnvironmentalManagement System we operate across the DWP contract. In addition to thiscontinued external recognition, we identified and trained a number of people as'Environmental Champions' throughout our business. With their support, weundertook a series of biodiversity surveys, sustainable catering andeco-friendly cleaning initiatives across our estate. Together with our supplychain we continue to focus on environmental initiatives and we set challengingtargets aimed at continuing to improve our collective performance. Commercial and business strategy Commercial and Business strategy has overall responsibility for theprofitability of our partnerships and for developing business plans across LandSecurities Trillium. It owns and drives value enhancement plans which allow usto leverage our scale and achieve aggregation benefits in areas such asrefinancing, insurance pooling and life cycle expenditure. Investment capital group Following the completion of the SMIF acquisition and as part of the generalreorganisation of Land Securities Trillium, a new division, the InvestmentCapital Group (ICG) was established. ICG's principal activities are therecycling and management of equity capital utilised within Land SecuritiesTrillium's ongoing PPP activities. ICG is committed to reduce substantially the capital invested in SMIF by the endof calendar year 2007, while retaining a significant management role and aminority equity holding in its existing PPP portfolio. The market and investorappetite for mature, long dated PPP investment is strong and we are evaluating anumber of options to access it. These options include the establishment of afund that should enable Land Securities Trillium to achieve its capitalrecycling objectives as we continue to acquire new contracts in the PPP marketin line with our business plan. Urban Community Development Urban Community Development seeks to generate high long-term returns from largescale mixed use residential led development projects. The continuing imbalancebetween supply and demand is creating strong growth in the residential marketswithin London and the South East, to our benefit. Kent Thameside Our primary area of activity is Kent Thameside where we own or have developmentrights over approximately 512 hectares of development land. Early in the first half of the year, we completed the sale of the remainder ofour land interests at Crossways Business Park, generating overall profits ofapproximately £5.7m. We also completed a 2,380sq m office building forward soldto Moat Housing Association. At Waterstone Park, substantial progress has been made on the delivery of thesecond phase of this development which is being led by our development partner,Countryside Properties. This award winning residential scheme in a contemporarystyle has achieved strong sales over the year with over 32 houses and 58apartments completed. Our principal holdings in Kent Thameside are Eastern Quarry and Ebbsfleet.Together these form Ebbsfleet Valley, the 420 hectare mixed use developmentlocated north of the A2, between the Bluewater Shopping Centre and the newEbbsfleet International High Speed Rail Station. This area has seen a stepchange in activity as the opening of the station for international services inNovember 2007 draws closer. At Eastern Quarry, we are making gradual progress towards concluding anagreement with the Highways Agency on the transport measures required toaccommodate our development proposals for some 6,250 new homes and spacetotalling 232,000 million sq m for employment, retail, leisure and other uses.We remain confident that it will be possible for planning permission to begranted in the near future. We have almost completed the first phase of theearth works needed to create the development platform for the first residentialvillage in Eastern Quarry. At Ebbsfleet, outline planning permission has already been obtained and workduring the year has concentrated on the detailed master planning studies neededto deliver development in the period up to the commencement of high speeddomestic rail services into London St Pancras in 2009. These will significantlyreduce current train travel times from Ebbsfleet to London from approximately 50minutes to 17 minutes. At Springhead Park, within the Ebbsfleet site, we proposed some 600 new homesand approximately 46,500sq m of new business space. Detailed planningpermission has been obtained for the first phase of 383 new homes, which is tobe undertaken in our second joint venture with Countryside Properties. Workstarted on this phase in March 2007. The delivery of this scale of development over a 25 year period as proposed atEbbsfleet Valley requires innovation, commitment and partnership with other keystakeholders. During the year, strategic alliances have been created to ensurethe most cost effective delivery of the utilities infrastructure that will beneeded. Heads of Terms have been entered into with Thames Water and EDF tocreate the Ebbsfleet Valley Multi Utility Company which, subject to the approvalof the Regulator, will deliver the full range of utility services needed. Headsof Terms have also been reached with British Telecom and Sky to deliver a fibreoptic network providing state of the art telephony and entertainment services tonew homes and businesses throughout Ebbsfleet Valley. Stansted At Easton Park, our 650 hectare landholding adjacent to Stansted Airport, wehave submitted further representations as part of the review of the RegionalSpatial Strategy for the East of England. These have identified the potentialof the site to help accommodate the growth forecast for the region and in theevent that permission for a second runway is granted on expansion of StanstedAirport. As part of our strategy to maximise medium-term income from the Easton Parkestate, we have submitted a planning application together with AggregateIndustries to seek approval for the extraction of some four million tons of sandand gravel. Business Analysis Portfolio valuation The market value of the investment property interests in the combined portfolio,including a pro-rata share of our property joint ventures totalled £14,752.5m at31 March 2007 (31 March 2006: £12,892.9m). Detailed breakdowns by sector,including comprehensive analyses of the Group's valuation, rental income andyield profiles, follow in the investment portfolio analysis. The aggregate ofthe market values of those investment properties held by the Group, excludingjoint ventures and Land Securities Trillium, as at 31 March 2007 was £13,114.8m(31 March 2006: £11,619.0m). The valuation of the freehold and leasehold investment properties in thecombined portfolio at 31 March 2007 was undertaken by Knight Frank LLP asExternal Valuer. The valuations were in accordance with the Royal Institute ofChartered Surveyors Appraisal and Valuation Standards and the InternationalValuation Standards. The valuation of each property was on the basis of marketvalue, subject to the assumptions that investment properties would be soldsubject to any existing leases and that properties held for development would besold with vacant possession in existing condition. The External Valuer'sopinion of market value was primarily derived using comparable recent markettransactions on arm's length terms. Combined portfolio analysisTable 15: Top 12 property holdings (by market value) Total value £4.1bn(28.1% of combined portfolio)Values in excess of £240.0m Cardinal Place, SW1New Street Square, EC4White Rose Centre, Leeds50 Queen Anne's Gate, SW1Bullring, BirminghamArundel Great Court and The Howard Hotel, WC2Gunwharf Quays, PortsmouthAlmondvale Centre, LivingstonPortland House, SW1Retail World, GatesheadThe Bridges, SunderlandEland House, SW1 Investment property business valuation analysis Combined portfolio reconciliation Table 16: Income statement - gross rental income reconciliation Other Year Other Year Retail London Investment ended Retail London Investment ended Portfolio Portfolio Portfolio 31/03/07 Portfolio Portfolio Portfolio 31/03/06 £m £m £m £m £m £m £m £mCombined portfolio 389.3 261.0 27.1 677.4 356.8 236.9 18.5 612.2Central London shops (52.5) 52.5 - - (47.1) 47.1 - -(excluding MetroShopping Fund LP)Inner London offices 1.5 (1.5) - - 1.5 (1.5) - -in Metro ShoppingFund LPRest of UK offices 2.3 - - 2.3 1.8 - - 1.8Allocation of other 10.6 7.8 (18.4) - 10.1 4.2 (14.3) - 351.2 319.8 8.7 679.7 323.1 286.7 4.2 614.0Less finance lease (4.4) (8.2) - (12.6) (5.1) (8.2) 0.1 (13.2)adjustmentTotal rental income 346.8 311.6 8.7 667.1 318.0 278.5 4.3 600.8 Table 17: Open market value reconciliation Other Year Other Year Retail London Investment ended Retail London Investment ended Portfolio Portfolio Portfolio 31/03/07 Portfolio Portfolio Portfolio 31/03/06 £m £m £m £m £m £m £m £mCombined portfolio 8,060.7 6,102.9 498.8 14,662.4 7,590.1 4,806.5 408.3 12,804.9Central London shops (1,182.6) 1,182.6 - - (1,053.8) 1,053.8 - -(excluding MetroShoppingFund LP)Inner London offices 21.0 (21.0) - - 18.3 (18.3) - -in Metro ShoppingFund LPRest of UK offices 90.1 - - 90.1 88.0 - - 88.0Allocation of other 237.0 196.8 (433.8) - 256.5 90.4 (346.9) -Combined portfolio 7,226.2 7,461.3 65.0 14,752.5 6,899.1 5,932.4 61.4 12,892.9 Table 18: Gross estimated rental value reconciliation Other Year Other Year Retail London Investment ended Retail London Investment ended Portfolio Portfolio Portfolio 31/03/07 Portfolio Portfolio Portfolio 31/03/06 £m £m £m £m £m £m £m £mCombined portfolio 512.4 394.3 23.4 930.1 470.3 344.4 26.3 841.0Central London shops (70.7) 70.7 - - (57.5) 57.5 - -(excluding MetroShoppingFund LP)Inner London offices 1.0 (1.0) - - 0.9 (0.9) - -in Metro ShoppingFund LPRest of UK offices 4.7 - - 4.7 5.0 - - 5.0Allocation of other 8.5 10.7 (19.2) - 15.3 6.7 (22.0) -Combined portfolio 455.9 474.7 4.2 934.8 434.0 407.7 4.3 846.0 Table 19: Top 12 occupiers Current gross rent roll %Central Government 10.1Deloitte 2.0J Sainsbury PLC 1.8DSG International PLC 1.8Taveta Limited (Arcadia Group) 1.7The Boots Company PLC 1.6The Home Retail Group PLC (Argos and Homebase) 1.2Metropolitan Police Authority 1.1M&S Group PLC 1.1Next PLC 1.1Lloyds TSB Group PLC 1.0Virgin Group Investments Limited 1.0Total 25.5 Table 20: % Portfolio by value and number of property holdings at 31 March 2007 £m Value Number of % properties0 - 9.99 1.4 6010 - 24.99 3.7 3225 - 49.99 10.2 3950 - 99.99 17.0 38100 - 149.99 18.3 22150 - 199.99 11.1 9Over 200 38.3 19Total 100.0 219 Note: Includes share of joint venture properties. Table 21: Combined portfolio value by location Shopping centres and Retail shops warehouses Offices Other Total % % % % %Central inner and outer London 10.5 0.7 43.8 0.6 55.6South East and Eastern 6.2 3.8 - 0.6 10.6Midlands 3.6 2.0 - - 5.6Wales and South West 4.8 1.4 0.1 - 6.3North, North West, Yorkshire and Humberside 8.1 6.1 0.3 0.1 14.6Scotland and Northern Ireland 5.4 1.7 - 0.2 7.3Total 38.6 15.7 44.2 1.5 100.0 % figures calculated by reference to the combined portfolio value of £14.8bn. Table 22: Average rents as at 31 March 2007 Average rent Average ERV £/sq m £/sq mRetailShopping centres and shops 392 460Retail warehouses (including supermarkets) 304 358OfficesCentral and inner London 404 550 Source IPD Notes: This is not a like-for-like analysis with the previous year. The shoppingcentres and shops average rent is an overall rent and are not Zone A rents. Excludes properties in the development programme and voids Table 23: Like-for-like reversionary potential as at 31 March 2007 Reversionary potential 31/03/07 31/03/06 % of rent % of rent roll rollGross reversions 12.2 11.1Over-rented (1.8) (3.4)Net reversionary potential 10.4 7.7 Notes: The reversion is calculated with reference to the gross secure rent roll afterthe expiry of rent free periods on those properties which fall under thelike-for-like definition as set out in the notes to combined portfolio analysis. Of the over-rented income, 65.2% is subject to a lease expiry or break clause inthe next five years. Reversionary potential excludes additional income from the letting of voids. Table 24:Business analysis is available on the company's website Table 25: Development pipeline financial summary Cumulative movements on the development programme to 31/03/07 Total scheme details Valuation Reval- Estimated Estimated surplus/ Capital uation total Estimated total (deficit) Market expend- Capit- surplus/ Disposals, Market capital total cost Net for year value at iture alised (deficit) SIC 15 rent value expend- capita- less income/ ended start of incurred interest to date and other at iture alised proceeds ERV 31/03/07 scheme to date to date (note 1) adjustments 31/03/07 (note 4) interest (note 2) (note 3) (note 1) £m £m £m £m £m £m £m £m £m £m £mDevelopmentprogrammelet, transferredor sold Retail warehouses 5 16 1 11 - 33 16 1 22 2 (2) Developmentprogrammecompleted,approved or in progress Shopping centres and shops 110 328 18 53 (5) 504 860 63 963 63 32 Retail warehouses 31 54 1 6 3 95 78 3 112 7 6 London Portfolio 387 752 55 719 41 1,954 1,358 126 1,871 148 421 528 1,134 74 778 39 2,553 2,296 192 2,946 218 459 Movement on proposed developments for the year ended 31/03/07Proposeddevelopments Shopping centresand shops Retail warehouses 6 - - - - 6 4 - 10 1 - London Portfolio 281 14 - 26 2 323 617 51 827 58 26 287 14 - 26 2 329 621 51 837 59 26 NOTES 1) Includes profit realised on the disposal of property. 2) Includes the property at the market valuation at the start of the financialyear in which the property was added to the development programme together withestimated capitalised interest. For proposed development properties, the marketvalue of the property at 31 March 2007 is included in the estimated total cost.Estimated total cost is stated net of residential proceeds for shopping centresand shops of £70m for developments in progress. The London Portfolio proposeddevelopments are stated net of residential proceeds of £122m. Allowances forrent free periods are excluded from cost. 3) Net headline annual rental payable on let units plus net ERV at 31 March 2007on unlet units. 4) For those schemes transferred or sold, completed or in progress the cost foreach scheme is shown on the preceding pages. The costs of the proposeddevelopment properties are not shown on a scheme by scheme basis as the schemeshave not yet been finalised and could still be subject to material change. Forproposed development properties the estimated total capital expenditurerepresents the outstanding costs required to complete the scheme as at 31 March2007 together with pre-development costs incurred prior to that date if thebenefit of that expenditure has been excluded from the valuation as at 31 March2007. Such pre-development costs are included in the accounts as prepayments andare not included in the property additions. Table 26: Land Securities Trillium contract analysis Contract IIC Norwich Telereal Other (50%)Year ended 31/03/07 DWP BBC Union DVLA Barclays II (3) Total (2)Contract lengthTerm (years) (1) 20.0 5.0 25.0 20.0 20.0 4.5Expiry date Mar Jun Jun Mar Dec Mar 2018 2006 2029 2025 2024 2010 Income statement £m £m £m £m £m £m £m £m £mUnitary charge 519.8 16.4 12.3 8.3 2.1 - - 558.9 -Third party (sublet) 8.0 - 0.9 - 1.6 - 0.9 11.4 -incomeCapital projects 129.4 10.5 0.5 6.6 - - 0.5 147.5 -Other revenue 10.6 6.4 0.9 1.2 - 44.9 2.9 66.9 1.6Proceeds of sales of - - 1.7 - - - - 1.7 -trading propertiesFinance lease income - - 5.1 1.0 - - - 6.1 -Gross property income 667.8 33.3 21.4 17.1 3.7 44.9 4.3 792.5 1.6Rents payable (174.4) - (3.7) (1.8) - - - (179.9) -Service partners (155.8) (11.7) (3.6) (4.0) - - (1.0) (176.1) -(maintenance,facilities, etc)Life cycle maintenance (23.0) - (1.1) (0.7) - - - (24.8) -costsCapital projects (126.1) (8.6) (0.5) (6.3) - - (0.5) (142.0) -Cost of sale of trading - - (0.5) - - - - (0.5) -propertiesOther costs, including (82.7) (10.2) (2.1) (2.2) (0.4) (28.8) (14.8) (141.2) (3.6)overheadsBid costs - - - - - - (2.8) (2.8) (0.9)Depreciation (24.8) - (0.7) (0.4) - - (0.5) (26.4) (0.1)Underlying operating 81.0 2.8 9.2 1.7 3.3 16.1 (15.3) 98.8 (3.0)profit /(loss)Profit on sale of 2.8 4.7 - - - - - 7.5 -non-current assetsNet surplus / (deficit) - - - - 0.8 - (14.4) (13.6) -onrevaluation ofinvestmentpropertiesSegment profit / (loss) 83.8 7.5 9.2 1.7 4.1 16.1 (29.7) 92.7 (3.0) Capital expenditureLife cycle maintenance (18.7) - (0.2) - - - (0.1) (19.0)costs capitalisedEstates costs (7.6) - - - - - (0.3) (7.9)capitalised Book value of assetsat 31 March 2007Investment in associate - - - - - - 5.0 5.0Investment properties - - - - 27.9 - 399.7 427.6Operating properties 507.5 - 43.4 - - - 0.6 551.5 (1) Barclays contract is a sale and leaseback term (2) IIC includes the results for which it was a joint venture (3) Other includes: i. Royal Mail - Revaluation deficit of £6.1m in relation to acquisitioncosts ii. Accor - One month trading £1.5m and revaluation deficit of £11.7m inrelation to stamp duty and other acquisition costs iii. Other - revaluation surplus of £3.4m Table 27: Land Securities Trillium contract analysis at 31 March 2007 Norwich Telereal Royal DWP Union DVLA Barclays II Mail Accor Other TotalFloor space 000sq m 000sq m 000sq m 000sq m 000sq m 000sq m 000sq m 000sq m 000sq mClient occupied 1,996.0 107.0 16.2 11.4 - 92.7 251.0 14.2 2,488.5Third party (sublet) 81.0 5.3 - 18.1 - 94.1 - 11.0 209.5Vacant 244.2 2.7 - 7.5 - 68.5 - - 322.9Total 2,321.2 115.0 16.2 37.0 - 255.3 251.0 25.2 3,020.9 Freeholds / valuable 840.0 40.0 - 11.3 - 128.5 251.0 25.2 1,296.0leaseholdsLeaseholds 1,481.2 75.0 16.2 25.7 - 126.8 - - 1,724.9Total 2,321.2 115.0 16.2 37.0 - 255.3 251.0 25.2 3,020.9Estate managed but not 78.7 8.7 86.7 - 150.0 - - - 324.1transferred PPP assets held for sale - 1,458,000sq m Table 28: Land Securities Trillium vacation allowance and portfolio activity - DWP 000sq m 31/03/06 Acquisitions Vacations * Lettings Disposals 31/03/07Client occupied 2,216.2 0.3 (220.5) - - 1,996.0Third party (sublet) 66.4 - (9.0) 34.6 (11.0) 81.0Vacant 163.5 - 229.5 (34.6) (114.2) 244.2Total 2,446.1 0.3 - - (125.2) 2,321.2 Freeholds / valuable leaseholds 861.5 0.3 - - (21.8) 840.0Leaseholds 1,584.6 - - - (103.4) 1,481.2Total 2,446.1 0.3 - - (125.2) 2,321.2 Estate managed but not transferred 93.1 - (14.4) - - 78.7 31/03/06 31/03/07Vacation allowance used to date - - - 234.1 392.7Available allowance - - - 289.7 130.5Future allowance - - - 198.2 164.4 * Includes core vacations Table 29: Land Securities Trillium portfolio activity - Barclays 000sq m 31/03/06 Acquisitions Vacations Lettings Disposals * 31/03/07Client occupied 11.4 - - - - 11.4Third party (sublet) 14.8 - (0.1) 3.4 - 18.1Vacant 23.9 - 0.1 (3.4) (13.1) 7.5Total 50.1 - - - (13.1) 37.0 Freeholds / valuable leaseholds 11.3 - - - - 11.3Leaseholds 38.8 - - - (13.1) 25.7Total 50.1 - - - (13.1) 37.0 * Includes lease surrenders, lease expiries and disposals. Table 30: Land Securities Trillium portfolio activity - Royal Mail000sq m 31/03/07Client occupied 92.7Third party (sublet) 94.1Vacant 68.5Total 255.3 Freeholds / valuable leaseholds 128.5Leaseholds 126.8Total 255.3 Since acquisition (07/03/07) there has been no change in the portfolio. Table 31: Land Securities Trillium number of people by occupationAs at 31/03/07 TotalAsset management 80Call centre 78Capital projects 143Quality assurance 31Facilities management 389HR/finance 110Business development and commercial 88Total 919 Table 32: Land Securities Trillium existing portfolio by useOffice 61%Education 17%Health 14%Other 8% Table 33: Land Securities Trillium existing portfolio by floor areaBusiness million sq mDWP 2,400,000Norwich Union 116,000DVLA 103,000Barclays 37,300Telereal II 150,000IIC 12,000SMIF 1,384,000Leicester Grammar School 16,000Accor 250,000Royal Mail 251,000SMIF (new) 41,000DTR 660,000Northern Ireland Civil Service 270,000 Financial Statements Consolidated income statement Before Before Exceptional Exceptional 2007 Exceptional Exceptional 2006 items items Total items items Total Notes £m £m £m £m £m £m Income: Group and share of joint ventures 1,722.7 - 1,722.7 1,988.2 - 1,988.2Less: share of joint ventures' income 10 (81.6) - (81.6) (159.5) - (159.5)Group revenue 2 1,641.1 - 1,641.1 1,828.7 - 1,828.7Costs 2 (1,046.2) - (1,046.2) (1,267.8) - (1,267.8) 594.9 - 594.9 560.9 - 560.9Profit on disposal of non-current properties 2 118.2 - 118.2 74.5 - 74.5Net surplus on revaluation of investment 2 1,307.6 - 1,307.6 1,579.5 - 1,579.5propertiesGoodwill impairment 2,4 - - - - (64.5) (64.5)Profit on disposal of joint venture (Telereal) 2,4 - - - - 293.0 293.0Operating profit 2,020.7 - 2,020.7 2,214.9 228.5 2,443.4Interest expense 3 (233.3) - (233.3) (201.8) - (201.8)Interest income 3 12.4 - 12.4 7.3 - 7.3 1,799.8 - 1,799.8 2,020.4 228.5 2,248.9Share of the profit of joint ventures 10 81.3 98.0 179.3 98.6 - 98.6(post-tax)Distribution received from joint venture 10 - - - 11.7 - 11.7(Telereal)Profit before tax 2 1,881.1 98.0 1,979.1 2,130.7 228.5 2,359.2Income tax (expense) / credit 5 (445.0) 1,994.2 1,549.2 (593.3) (90.0) (683.3)Profit for the financial year attributable to 15 1,436.1 2,092.2 3,528.3 1,537.4 138.5 1,675.9equity shareholders Earnings per shareBasic earnings per share * 7 753.59p 357.95pDiluted earnings per share * 7 750.54p 356.50p* adjusted earnings per share is given in note 7 Consolidated statement of recognised income and expense 2007 2006 £m £mActuarial losses on defined benefit pension schemes (1.3) (5.0)Deferred tax on actuarial losses on defined benefit pension schemes 1.0 1.5Fair value movement on cash flow hedges taken to equity - Group 6.7 (2.2)Fair value movement on cash flow hedges taken to equity - joint ventures 11.8 (2.7)Deferred tax on fair value movement on cash flow hedges taken to equity - Group (1.6) 0.6Deferred tax on fair value movement on cash flow hedges taken to equity - joint ventures (2.3) 0.8Net gains / (losses) recognised directly in equity 14.3 (7.0)Profit for the financial year 3,528.3 1,675.9Total recognised income and expense attributable to equity shareholders 3,542.6 1,668.9 Consolidated balance sheet Notes 2007 2006 £m £mNon-current assetsInvestment properties 9 12,891.7 11,440.5Property, plant and equipment Property partnerships properties 9 979.1 563.2 Other property, plant and equipment 9 78.2 73.6 9 13,949.0 12,077.3Net investment in finance leases 262.4 233.9Goodwill 129.6 34.3Investments in joint ventures 10 1,338.8 829.5Total non-current assets 15,679.8 13,175.0Current assetsTrading properties and long-term development contracts 148.3 255.9Trade and other receivables 641.8 578.9Cash and cash equivalents 52.7 15.6Total current assets (excluding non-current assets classified as held for sale) 842.8 850.4Non-current assets classified as held for sale 11 2,420.3 -Total current assets 3,263.1 850.4Total assets 18,942.9 14,025.4 Current liabilitiesShort-term borrowings and overdrafts (1,683.2) (163.6)Trade and other payables (783.9) (585.0)Current tax liabilities (535.8) (212.5)Total non-current liabilities (excluding liabilities directly associated with non- (3,002.9) (961.1)current assets classified as held for sale)Liabilities directly associated with non-current assets classified as held for 11 (1,601.0) -saleTotal current liabilities (4,603.9) (961.1)Non-current liabilitiesProvisions (80.7) (58.2)Borrowings 12 (3,457.4) (3,537.9)Net pension benefit obligations 13 (5.6) (6.5)Deferred tax liabilities 14 (4.0) (1,967.8)Total non-current liabilities (3,547.7) (5,570.4)Total liabilities (8,151.6) (6,531.5)Net assets 10,791.3 7,493.9 EquityOrdinary shares 15 47.0 46.9Own shares 15 (14.5) (3.4)Share-based payments 15 7.9 6.3Share premium 15 51.5 43.2Capital redemption reserve 15 30.5 30.5Retained earnings 15 10,668.9 7,370.4Total shareholders' equity 10,791.3 7,493.9 Consolidated cash flow statement Notes 2007 2007 2006 2006 £m £m £m £mNet cash generated from operationsCash generated from operations 16 682.4 591.5Interest paid (237.5) (187.7)Interest received 12.4 7.3Funding pension scheme deficit (3.9) (4.9)Taxation (corporation tax paid) (91.9) (30.3)Net cash inflow from operations 361.5 375.9Cash flows from investing activitiesInvestment property development expenditure (429.4) (236.6)Acquisition of investment properties (523.7) (1,429.2)Other investment property related expenditure (77.2) (78.8)Acquisition of properties by Property partnerships (416.5) (6.8)Capital expenditure by Property partnerships (26.0) (22.9)Capital expenditure on properties (1,472.8) (1,774.3)Disposal of non-current investment properties 841.0 675.5Disposal of non-current operating properties 28.8 4.1Net expenditure on properties (603.0) (1,094.7)Net expenditure on non-property related non-current assets (18.8) (26.9)Net cash outflow from capital expenditure (621.8) (1,121.6)Receivable finance leases acquired (43.3) (84.8)Receipts in respect of receivable finance leases 3.8 2.3Net loans from / (to) joint ventures and cash contributed 10.8 (72.8)Distributions from joint ventures 39.2 206.6Net cash advanced to disposal group (372.6) -Proceeds from disposal of joint venture (Telereal) - 293.0Acquisitions of Group undertakings (net of cash acquired) 17 (521.4) (321.2)Net cash used in investing activities (1,505.3) (1,098.5) Cash flows from financing activitiesIssue of shares 8.4 11.9Purchase of own share capital (36.2) (1.9)Increase in debt 1,433.9 1,221.2Debt repaid on acquisition of Group undertaking 17 - (257.9)Decrease in finance leases payable (2.2) (1.2)Dividends paid to ordinary shareholders (223.0) (238.9)Net cash inflow from financing activities 1,180.9 733.2Increase in cash and cash equivalents for the year 37.1 10.6 Notes to the financial statements To view the Notes to the financial statements, follow the link below; http://www.rns-pdf.londonstockexchange.com/rns/5942w_-2007-5-16.pdf This information is provided by RNS The company news service from the London Stock Exchange

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